[Expertise]
Chinese Economy and Relations among Japan/China and the United States

At one time, many major Japanese companies placed their names on the list of top global companies, but nowadays they have suffered setbacks, losing ground to American and Chinese companies. What are the reasons? Are there any solutions?

In my previous report, I sorted out the problems currently facing Japan. I mainly pointed out the too short term of office of company presidents in Japan.

Following the previous report, I would like to further sort out the problems that Japanese companies face and indicate the prerequisites for their revival.

3．Reason 2: There is no system to cultivate leaders fit to be company presidents in Japan.

The second reason is that Japanese companies do not have an adequate system to cultivate persons fit to be company presidents.

In general, Japanese companies elect presidents from personnel resources brought up within the company and very rarely bring in presidents from outside.

The duties of company presidents are heavy, making it extremely difficult for them to neatly carry out work and achieve certain results.

There are many cases where very talented executives who have even been regarded most fit to be president undergo suffering shortly after their assumption of office if they are unprepared for the mindset and experience necessary to be president.

In order to avoid such cases, it is necessary to build a system whereby personnel resources considered fit to be president are noted in their late twenties or early thirties and are led to gain experience required to become president over a long period of time.

They will be given opportunities to gain experience of important posts when young without being informed of the purpose, and it will be repeatedly verified whether they have the ability fit to be president.

In the process, the number of persons of similar age will gradually be narrowed down, and when they reach a certain age and position, each person will be informed that he/she is one of the candidates for the position of president and made to have clear awareness.

Subsequently, being made aware that they have a good chance of becoming president, the candidates will assume heavy responsibility to further develop themselves.

Some companies have already adopted such a system. It should be helpful for Japanese companies, where employees brought up within the company assume the office of president, to adopt these methods and cultivate personnel resources for top leaders to steadily produce personnel resources fit to be president.

However, it is also an important alternative to bring in an outside president equipped with high competence through headhunting of former presidents of other companies, as many Western companies do.

4．Reason 3: Existing personnel rotation is inappropriate for the age of globalization.

The third reason is the problem of personnel rotation.

Major Japanese companies have a strong tendency to prefer generalists as executive personnel. Accordingly, most major companies often limit the length of overseas assignment of elite personnel resources to a few years in one country.

In general, elite personnel resources experience one or two important posts in the United States, Europe or China for three to four years, after which they are called back home to assume important domestic posts that have little relation with the countries where they have been engaged.

Under such circumstances, they can neither deeply understand the markets of the countries and regions they have been engaged with nor develop strong relationships with the local people.

It takes personnel ten years or more of experience in one region to establish and implement various strategies for product development, production management, sales networking, etc.

When these personnel, well-versed in major overseas markets, come into close association with local talented leaders, great results will be produced for the first time. Cultivation and active utilization of these personnel are extremely important in promoting management globalization.

However, in many cases, companies seldom have several specialists with over ten years of overseas experience in one region serve as executives above managing director or senior managing director.

This has numerous negative effects, such as the dismissal of superior overseas items on account of judgment by Japanese standards and loss of business opportunities to other companies due to business judgment delay.

Since only a few are well-versed in overseas markets, board members tend to blindly accept inaccurate media information provided by major domestic and overseas papers and magazines and use them to assess overseas market risks, which are often exaggerated, resulting in the dismissal of superior items.

On the other hand, there are also many cases in which the long-term low-growth conditions of the very Japanese economy are not considered a risk, causing contradiction in the different criteria of country risk assessment between overseas and domestic items, which is left uncorrected for a long time.

In order to take full advantage of business opportunities and rapidly develop business based on management decisions that properly grasp the global market, it is essential that specialists well-versed in overseas markets and generalists with high capability of running overall management work together in harmony and close cooperation.

In order to steadily cultivate such excellent specialists as executive management, it is essential to re-evaluate the current short-term rotation of elite personnel resources.

The fourth reason is the negative effects of the trend to accelerate management objectives.

Most Japanese companies practice the bottom-up management style. The company president decides the basic policy that is shared within the company. Based on the policy, the divisions consider on site concrete measures, which are proposed, approved by general managers and executives, and finally decided at the board meeting.

In top-down management style, it generally takes a certain time for the top executive's management policy to be made known to all employees and for the policy to be properly reflected in actual business operations.

In contrast, in bottom-up management style, the speed of deciding the company's management policy may be slow, but once the decision is made, awareness of the issue is shared from top management to all employees within a short period of time, enabling thorough execution of operations, which may produce excellent corporate management results when the system functions smoothly.

The other characteristic of major Japanese companies is that companies are based on lifetime or long-term employment.

In most cases, employees not only receive salaries and bonuses but also feel great comfort within a community of work mates based on relationship of mutual trust and a sense of fulfillment in achieving goals as a team.

With such employment practices, it is possible for divisions, in which employees have strong relationship of mutual trust and share high aspirations, to achieve amazing results that short-term oriented foreign companies cannot match in mid- and long-term research and development and improvement of production management.

The long-lasting stagnation of the Japanese economy since the 1990s caused many Japanese companies to lose confidence in their Japanese-style management and original strengths as mentioned above.

Companies increasingly tended to adopt elements of Western-style management and place emphasis on short-term management goals such as higher profits and stock prices.

A majority of shareholders tends to value higher stock prices in the short term and does not often appreciate advance investment and management organization reforms made in a long-term perspective as drastic measures to meet structural changes of the global market.

For example, in establishing new business overseas, it has become a rule shared by many major companies that any business that has no prospect of producing profits within three years of start should not be launched.

As a result, no fruit has been borne from projects that require mid- and long-term efforts such as new technologies and products produced via continued mid- and long-term research and development, sales network built via mid- and long-term market development efforts, etc.

Thus, it is undeniable that Japanese companies have lost their competitiveness.

Although similar problems also exist in short-term oriented Western companies, many Western companies are able to reorganize their structure to meet new business challenges within a short period of time via short-term exchange of top management by proactively accepting outside personnel also as president and executives and prompt redistribution of management resources made possible by top-down management style.

On the other hand, Japanese companies quite seldom go so far as to review their structures, which in many companies are characterized by lifetime and long-term employment and the president being elected from personnel brought up within the company.

It can be viewed that Japanese companies adopted only the short-term oriented management style of Western companies without considering the initial difference in management structures, and being unable to make full use of its advantages, lost their original strength and competitiveness.

Needless to say, being listed companies, Japanese companies cannot neglect stock prices and profit levels, but they should make efforts to develop their own management style by exploring ways of research and development and global market development from a long-term perspective suitable to their characteristics.

6．Take on challenges in the Chinese market.
A good opportunity for Japanese companies to restructure management

In recent years, new market areas that do not exist in Japan are rapidly growing in China.

Some typical examples are electric cars, ridesharing, financial technology (FinTech) and smartphone society. Japan has no markets in these areas. Even if there were any, they would be incomparably smaller than and compare very poorly in service and technology levels with those of China.

For this reason, Japanese companies cannot draw on their experience in Japan when entering the Chinese market. Companies should move into the actual Chinese market and understand the market demand on site before conducting research and development, building production systems, and expanding sales network.

It will provide a good opportunity to learn management styles other than the Japanese standard.

It is expected that young and mid-level employees who have accumulated experience in such newborn and promising overseas markets will become the front line of seeking new ways when Japanese companies conduct management reforms toward becoming truly global companies.

If companies were to aim at management reform focusing on further globalization in the future from such perspective, it would be useful to send a certain number of competent executive candidates to China's most advanced markets of Shenzhen, Beijing, Shanghai, etc. or to the Silicon Valley and have them acquire the business sense necessary in assuming globalized management.

If the candidates are competent, they will build relations of trust with similarly competent local personnel, and after each has become successful, it is quite likely that they will realize big business alliances in the global market as management executives of leading companies in industry.

The transformation into truly global companies is a long and winding road. I place my hopes on the management of Japanese companies to make bold decisions and continuous efforts in challenging difficult problems while looking forward to the future.

(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on June 20, 2018.)